Low inflation levels for August and September may result in lower limits on 2010 contributions to qualified retirement plans, further complicating participant efforts to rebuild their retirement nest eggs. The limits are calculated based on a statutory formula, using each year's third-quarter consumer price index (CPI-U).
If the resulting amounts are lower than the 2009 limits, employers will be looking to the Internal Revenue Service for guidance, according to Mercer. The limits affect plan deferrals, catch-up contributions, plan compensation, Section 415 limits, maximum annuities in defined benefit plans, and compensation used to identify key and highly compensated employees for testing purposes.
Mercer reports that the Internal Revenue Code is unclear about what will happen if the formula results in lower limits. Some believe the limits would then remain at 2009 levels; others say the limits will be lowered. If the latter is done, there would be adverse consequences not only for participants struggling to rebuild their savings, but also for nondiscrimination tests.
If the Section 415 limits for defined contribution plans, the plan compensation limits, and the defined benefit plan maximums are reduced for 2010, one effect could be a reduction in benefits for some participants. It would be wise to think through the implications of such a reduction with your plan's counsel.
For example, ERISA Section 204(h) requires that pension plans give 45 days advance notice of a plan amendment to any participant whose future accruals will be reduced by the amendment. The IRS views annual limit adjustments as plan amendments, which may trigger this notice requirement. If it does, and if yours is a calendar year plan, the notice deadline would be November 17, 2009 .
Mercer also suggests that you consider how you will revise any tools you offer participants for calculating their retirement benefits, such as financial planning tools and online benefit calculators. Consider, also, how you will communicate these changes to participants. It might be an appropriate time to review all of your plan communications in light of this potential reduction, as you await the final decision.